Article © By Robert E. Bloch And Scott P. Perlman
Introduction
In connection with its workshop on business-to-business ("B2B") exchanges on June 29- 30, 2000, the Federal Trade Commission ("FTC") posed a number of questions regarding the public policy implications of B2Bs, including:
- What competition issues may be raised by B2B electronic marketplaces? What are likely procompetitive benefits, and what are possible anticompetitive concerns?
- Under what circumstances are B2B electronic marketplaces likely to increase or diminish competition? What has been the experience so far?
- How do B2B electronic marketplaces affect entry at the buyer or seller level? How does entry occur in the market for B2B electronic marketplaces?
- What issues are relevant to structuring and implementing B2B electronic marketplaces in order to realize efficiencies and avoid competitive problems? For example, what mechanisms might be included to prevent inappropriate sharing of competitive, confidential information? Are any of these mechanisms likely to be impractical or undesirable from a business perspective?
- Does the development of competition within and among B2B electronic marketplaces depend in part on any intellectual property rights relating to the design or operation of such marketplaces?
- What implications, if any, do B2B electronic marketplaces have for market structure and market concentration?1
The following is a brief analysis of these issues as they arise in connection with a hypothetical B2B exchange being formed by wholesalers in the toy industry. The analysis attempts to provide practical guidance to those forming or advising a B2B exchange based both on traditional antitrust principles as well as insights gained by the authors’ from the FTC Workshop.2
Hypothetical Toy Wholesalers B2B
A, B, C and D are four major wholesalers of toys (the "Wholesalers"). Together they account for approximately 50 percent of all purchases from toy manufacturers. The Wholesalers propose to form a business-to-business on-line exchange to facilitate transactions between themselves and both toy manufacturers and retailers (the "Exchange").
The primary purpose of the Exchange will be to eliminate costs from the toy manufacturer-to-retailer supply chain. The Wholesalers believe that use of the Exchange for on-line purchasing will reduce transaction costs and facilitate "reverse auctions" -- in which sellers are required to bid against each other for a purchaser’s business -- that will result in lower product costs. The Exchange also will provide data on orders and inventory to all participants that they can use to manage production and inventory levels in a more cost efficient manner. While most of this data will be specific to the transactions being engaged in by the particular participant, aggregated data concerning other parties’ purchases also will be provided. The data provided by the Exchange will include certain data on orders and inventory that had been provided to customers by the Wholesalers on an individual basis. The Exchange will provide this and other data for a fee set by the Exchange’s Board of Directors.
The Wholesalers contemplate that the Exchange also may engage in certain joint purchasing activities on their behalf, and may combine certain ordering and warehousing functions. For example, the Exchange may create a common ordering system that will be used by all of the Wholesalers, and may manage a process by which the Wholesalers’ will lease space to each other in their respective warehouses in order to use available warehouse space in the most efficient manner possible.
The Exchange will be governed by a five-member Board composed of one representative of each Wholesaler as well as the CEO of the Exchange, who will be hired by the Board but will not be a current or former employee of any of the Wholesalers. The Wholesalers will be prohibited from forming or taking an equity interest in any competing exchange for five years after formation of the Exchange, and will be prohibited from making purchases or sales through any other exchange for three years, after which each Wholesaler agrees to make 80 percent of both its purchases and sales through the Exchange.
The Exchange Board may vote to admit other wholesalers as equity partners in the Exchange. Such members will be required to adhere to the same non-competition and purchase requirements as the Wholesalers. The Wholesalers also will encourage as many wholesalers, manufacturers and retailers as possible to conduct transactions through the Exchange. The Exchange Board will set criteria for participants, however, including standard technology that must be used by all participants and financial criteria.
Issues Raised by the Formation and Operation of the Exchange
The formation of a business-to-business marketplace like the Exchange by competitors is analyzed as a joint venture or competitor collaboration under the antitrust laws. See Antitrust Guidelines for Collaborations Among Competitors, issued by the FTC and the U.S. Department of Justice ("DOJ"), April 2000 ("Collaboration Guidelines"). See also "FTC enforcers believe B2B auctions are similar to JVs," FTC Watch, April 10, 2000, 6 (report of discussion by David Balto, Assistant Director, FTC Policy and Evaluation Office) ("Balto Article"); "The Evolution of Electronic B2B Marketplaces," Susan S. DeSanti, Director, Policy Planning, Federal Trade Commission, Remarks before the Federal Trade Commission Public Workshop: Competition Policy in the World of B2B Electronic Marketplaces, June 29, 2000 ("DeSanti"), 8.
The formation of a joint venture by competitors can raise two general categories of issues under the antitrust laws: (1) structural issues under Section 7 of the Clayton Act, which prohibits mergers that are likely to substantially lessen competition or tend to create a monopoly; and (2) operational issues under Section 1 of the Sherman Act, which prohibits conspiracies that result in unreasonable restraints of trade.
The principal structural issues raised by the Exchange are:
- Monopoly or Market Powe r. Whether, by combining certain activities through the Exchange, such as providing data to customers on orders and inventory, the Wholesalers will be able to exercise market power, i.e., the power to raise prices above competitive levels or to exclude competitors in any relevant market in which they provide products or services.
- Monopson y. Whether, by combining certain purchasing activities through the Exchange, the Wholesalers will be able to exercise monopsony power, i.e., the power to drive prices for the purchased product(s) or service(s) below the prices that would prevail in a competitive buying market, thereby depressing output of the product(s) or service(s). See Collaboration Guidelines, Section 3.31(a).
The principal operational issues include:
- Legitimac y. Whether the Exchange is a legitimate joint venture that will produce new products or significant procompetitive efficiencies that the Wholesalers could not have achieved separately, or a cartel formed to enable the Wholesalers to fix prices, allocate markets or purchases, or commit other anticompetitive acts.
- Collusio n. Whether the Exchange will facilitate collusion between competitors among any participating wholesalers with respect to the prices of the products and services they sell to retailers, among manufacturers with respect to the prices of the products they sell to wholesalers, or among retailers with respect to the products they sell to consumers. Such collusion could result from the operations of the Exchange in a number of ways, including:
- Wholesalers will purchase such a high percentage of their supplies through the Exchange at the same prices that a large percentage of their costs will become standardized, which will make collusion on the prices of the goods and services they sell easier. See Collaboration Guidelines, Section 3.31(a).
- Participation by the Wholesalers in the governance and operations of the Exchange, including meetings of the Board, will provide opportunities to discuss the costs of supplies and the prices of the products and services they sell.
- Wholesalers will obtain access to data provided to the Exchange concerning the prices at which competing wholesalers sell goods and services to retailers, which information could be used by competing wholesalers both to reach an agreement on prices and to monitor compliance with such an agreement. See Collaboration Guidelines, Section 3.31(b).
- Wholesalers will obtain access to data provided to the Exchange concerning the purchases of competing wholesalers, including information regarding the costs and quantities of such purchases, and other cost data (such as the internal cost of warehousing space) which information could be used by competing wholesalers both to reach an agreement on prices and/or to monitor compliance with such an agreement (e.g., by monitoring costs and, indirectly, quantities sold to retailers).
- Manufacturers will obtain access to data provided to the Exchange concerning the prices at which competing manufacturers sell goods to wholesalers, which information could be used by competing manufacturers both to reach an agreement on prices and to monitor compliance with such an agreement.
- Retailers will obtain access to data provided to the Exchange concerning the prices at which competing retailers purchase goods and services from wholesalers, which information could be used by competing retailers both to reach an agreement on prices for the products they sell and to monitor compliance with such an agreement.
- If one or more Exchange members at some point join a rival exchange, the participation of these members in multiple exchanges will result in collusion between the exchanges or members of the exchanges who compete.
- The Exchange is over inclusive, i.e., the number of wholesalers participating is in excess of the number needed to achieve any plausible efficiencies, and the large number participating makes the exercise of market and/or monopsony power more likely and makes collusion among the wholesalers easier to accomplish and more likely to be effective in increasing prices. See Balto Article, 7.
- Restrictions on Equity Participation in Other Exchange s. Whether the agreements by the Wholesalers and other equity investors in the Exchange not to form or become members of any competing exchanges are reasonably necessary to the procompetitive purposes of the Exchange, or are an unreasonable restraint on competition that will prevent the formation of competing exchanges. See DeSanti,14.
- Minimum Participation Commitment s. Whether the commitment by the Wholesalers and other equity investors in the Exchange to make all or most of their purchases and sales through the Exchange will result in an anticompetitive degree of foreclosure to rival exchanges and to manufacturers and retailers not participating in the Exchange.
- Criteria for Admitting Others to Exchang e. Whether criteria defined by the Exchange Board regarding which manufacturers, wholesalers and retailers are permitted to participate in the Exchange will result in excluded manufacturers, wholesalers and retailers being unreasonably foreclosed from access to Exchange participants that the excluded parties need to compete. See DeSanti, 14-16.
Impact of the Exchange on Competition, Entry and Market Structure
A. The Exchange is a Legitimate Joint Venture with the Potential to Create Significant Procompetitive Efficiencies
The threshold competition question regarding the Exchange is whether it is a legitimate joint venture or a cartel formed to raise prices or engage in other anticompetitive behavior. A joint venture that constitutes an agreement by competitors to fix prices, or allocate markets, customers or suppliers is per se illegal under the antitrust laws; a legitimate joint venture is evaluated under the "rule of reason," under which the venture’s actual or potential procompetitive benefits are weighed against its actual or potential anticompetitive effects. See Collaboration Guidelines, Section 1.2. A venture will be viewed as legitimate if it provides a new product or service that the venture parties could not have provided acting separately, or if it involves substantial economic integration likely to result in significant efficiencies. See Collaboration Guidelines, Sections 1.2, 3.2.
Under these standards, it is clear that the Exchange should be considered a legitimate joint venture. The Exchange will provide a new type of product or service, an electronic marketplace available to all toy manufacturers, retailers and wholesalers, that the parties cannot provide on their own, and that should produce a number of significant efficiencies in terms of reduced transaction costs and more efficient management of inventory and production.
Indeed, based on the statements of a number of panelists at the FTC Workshop, it appears that existing B2Bs with objectives similar to those of the Exchange already have achieved such efficiencies. For example, Patrick Stewart, CEO of MetalSite, L.P., a B2B in the metals industry that had been operating for approximately five years at the time of the FTC Workshop, explained that MetalSite had streamlined significantly ordering processes that previously had required multiple, manual steps and had improved the efficiency of the supply chain by facilitating back hauls (e.g., MetalSite had provided information to logistics companies that haul steel so that otherwise empty flatbed trucks could pick up metals on their return trips). See FTC Workshop Transcript ("FTC Tr."), 53-54, 63-69. 3 Sam E. Kinney, co-founder and Executive Vice President of FreeMarkets, Inc., a company that creates electronic marketplaces for industrial materials, described a reverse auction for printed circuit boards that saved United Technologies approximately 42 percent over conventional purchasing methods. FTC Tr. 80-85. Given these types of potential efficiencies, the toy Exchange clearly should be evaluated under the rule of reason. See also DeSanti, 9, n. 18 ("so long as the underlying formation and operation of the B2B e-marketplace appears procompetitive, and associated agreements appear plausibly to represent legitimate efforts to achieve procompetitive benefits, per se treatment appears unlikely.").
B. The Exchange’s "Open Platform" Can Increase Market Access and Reduce Entry Barriers in the Toy Industry
A business-to-business electronic marketplace like the Exchange has the further potential to increase competition among manufacturers, wholesalers and retailers, lower entry barriers and decrease market concentration at all three levels of competition. Like the Exchange, most B2B exchanges with which we are familiar plan to create an "open platform" to which all buyers and sellers in their industry can gain access. Such open access policies have the potential to make smaller buyers and sellers more competitive by putting them on the same platform, and making their products as easy to locate and evaluate, as those of better known rivals.
For example, a small toy manufacturer currently may not be able to compete effectively for many sales because it lacks the sales force and other resources to market its products effectively outside of its local area. Access to the Exchange, on which its products can be offered to wholesalers and retailers throughout the U.S. and perhaps the world, may enable such a manufacturer to compete for many sales currently beyond its reach.
The ability of B2B exchanges to confer these procompetitive benefits was described by a number of the panelists at the FTC Workshop, who indicated that B2B exchanges allow small companies to expand their geographic reach to new territories and customers and may make it economical for suppliers to serve small customers to whom it was previously too expensive to market.4 Panelists also suggested that a B2B started by major industry competitors can make technology available to smaller rivals who never would have been able to afford this on their own.5
Decreased transaction costs also may encourage increased entry and expansion on both the buyer and seller side in industries in which such costs are significant. In the previous example, for instance, a small toy manufacturer may find it is profitable to expand its plant or to open a new plant in a different part of the country because it now will have access to additional sales. B2B exchanges that lower entry barriers and increase the competitiveness of smaller players also may result in decreased market share for established players. The result should be a more competitive market with lower prices and better quality products and services for consumers.
C. Potential Anticompetitive Effects of Exchange Excluding or Imposing Biased Rules on Non-Owners
A B2B marketplace like the Exchange only can produce the benefits described above if it is truly open. "Open" in this context should not mean, for instance, that the Exchange Board is required to allow any party seeking access to have it, but rather, that the Exchange will employ reasonable, objective criteria in determining who may participate (e.g., that participants be able to use the technology being employed by the Exchange for ordering and data collection, creditworthiness, etc.). See Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 501 (1988); see also Northwest Wholesale Stationers, Inc. v. Pacific Stationary and Printing Co., 472 U.S. 284, 294-297 (1985) (exclusionary conduct by competitor joint venture may be supported by business justifications showing that conduct was "intended to enhance overall efficiency and make markets more competitive.").
On the other hand, if the Exchange Board uses arbitrary eligibility criteria to prevent smaller manufacturers, wholesalers or retailers from obtaining access to the Exchange, the Exchange could have anticompetitive effects. See Allied Tube & Conduit Corp., 486 U.S. at 509-511 (affirming liability of fire safety association member for influencing association to adopt biased safety code that favored member’s products). As more and more transactions in the toy industry are conducted on the Exchange, these smaller players would be marginalized increasingly, and lack of access to the Exchange would become an ever greater barrier to entry. See United States v. Terminal Railroad Association of St. Louis, 224 U.S. 383 (1912) (railroad joint venture that owned and operated terminals violated Section 1 of the Sherman Act by excluding non-member railroads from using terminals where access to terminals was necessary for non-members to compete); see also DeSanti, 15 (will analyze whether exclusion of certain competitors from exchange "significantly raises rivals’ costs by denying or limiting access to a key input."). Open access therefore may be a critical factor in ensuring that the Exchange plays a procompetitive rather than an anticompetitive role in the particular markets in which it operates.
Concern over open access as well as other restrictive rules may be greater when, like the Exchange, a B2B marketplace is formed and controlled by industry players. A number of panelists at the FTC workshop, particularly those aligned with exchanges formed by small business or "neutral," non-industry players, or who viewed themselves as being aligned with buyers, expressed the concern that ownership by industry players, particularly by suppliers accounting for a large combined share of their industry, results in the controlling parties setting rules that discriminate against their non-owner competitors and that ensure the owners, rather than their customers, capture the value created by the exchange.6
Other panelists, including Patrick Stewart of MetalSite and Andra P. Dupont, Director of Electronic Market Channels for The Dow Chemical Company, indicated that ownership by industry players may be necessary and more effective than non-industry ownership because of the strong incentive industry players have to achieve the efficiencies a B2B can offer and their ability to commit the resources required to achieve these efficiencies.7 Moreover, several members of the panel made up of exchange owners and operators suggested that any effort by industry players to impose bias on an exchange would be corrected by the marketplace.8 In other words, if participants in a B2B marketplace like the Exchange viewed it as biased they would move to other exchanges servicing the toy industry; the Exchange’s need for credibility to attract participants and competitive forces would prevent bias by the Wholesalers from being a problem.
This argument assumes, of course, that a number of exchanges would be operating or could enter to compete with the Exchange. On the other hand, if there were few competing exchanges in the toy industry and entry by additional exchanges was difficult, restrictions on access and/or discriminatory rules imposed by the Wholesalers would be more likely to result in anticompetitive effects.
D. Factors Affecting the Likelihood of New Exchanges Entering the Toy Industry, Including Non-Competition and Minimum Commitment Provisions
There are a number of factors relevant to the likelihood that a new B2B marketplace could enter and compete successfully with the Exchange. For a B2B exchange to form and operate effectively, it requires the participation of players of a sufficient number and size at each level of distribution involved, as well as access to the necessary software and technology for the exchange to operate. Access to the necessary software does not appear to be a problem. As we understand the facts, several companies currently are offering or have announced relevant software packages, including Oracle, Ariba and CommerceOne, as well as a number of other companies. Access to buyers and sellers of a sufficient size and number may present a more difficult problem, however.
Thus far, it appears that, like the Exchange, B2B marketplaces in many industries are being formed by a small number of significant industry players (e.g., auto manufacturers, major airlines, major pharmaceutical manufacturers, major retailers). This suggests that formation of an exchange may require a small number of large competitors to "anchor" the exchange and provide a sufficient initial volume of transactions to make the exchange’s operations cost-efficient as well as to attract additional participants. In an industry in which all or many of such anchor participants already have joined a particular exchange, the formation of additional exchanges may be difficult.
In some industries, it may be the case that formation of a small number of exchanges, or even one exchange, is the most efficient outcome. For instance, a number of panelists at the FTC Workshop indicated that they expected most industries to support only two to three major exchanges, with perhaps a number of small niche exchanges also being formed.9 See also DeSanti, 16 (in some industries, "network effects [may] dictate that only a few marketplaces dominate the industry."). In industries in which more than one exchange can function effectively, however, provisions that prevent exchange participants from participating in rival exchanges or forming essential networks may raise entry barriers for additional exchanges.
Non-competition provisions that prevent exchange members from forming or participating in rival exchanges can raise competitive issues under Section 1 of the Sherman Act. In general, agreements by actual or potential competitors not to compete are per se illegal violations of Section 1. Where such an agreement is ancillary to the procompetitive purposes of a joint venture, however, it is evaluated under the rule of reason. The test is to show that the restraint is "reasonably related to, and reasonably necessary to achieve" the venture’s procompetitive benefits. To be "reasonably necessary," an agreement need not be essential; rather, it need only be the case that the parties could not achieve equivalent or comparable procompetitive efficiencies through "practical, significantly less restrictive means." Collaboration Guidelines, Sections 1.2, 3.2.
As described above, the Wholesalers forming the toy Exchange are prohibited from obtaining an equity interest in or forming a rival exchange for five years or conducting any transactions through a rival exchange for three years, and are required to make 80 percent of their purchases and sales through the Exchange thereafter. To justify these restraints, the Exchange would need to show, for instance, that they were reasonably necessary to attract investors who need some assurance that members will use the Exchange for a sufficient volume of their transactions to achieve contemplated efficiencies and make the Exchange profitable. Even if the Exchange can make this showing, however, it still would have to demonstrate that the restrictions are valid under the rule of reason.
Whether the above requirements covering these time periods and thresholds are on balance anticompetitive will depend on the facts of each particular industry. See DeSanti, 16 (must look at specific facts re the presence of minimum purchase requirements and other restrictions on participation in rival exchanges to determine if impact on market for exchanges is anticompetitive). In the toy industry, if there are other significant wholesalers available to form rival exchanges, or if competing exchanges can be formed by players at other levels in the supply chain (e.g., by manufacturers), these provisions may have little effect.
If relatively few other significant wholesalers are available, however, (e.g., if the Exchange is over inclusive in that it has more participants than are needed to achieve procompetitive efficiencies, and leaves too few wholesalers to form rival exchanges), and/or if players at other levels in the supply chain cannot form an effective competing exchange, these provisions, either separately or together, could increase the difficulty of new entry significantly.
Managing Information Sharing and the Need for Antitrust Guidelines
An important aspect of many exchanges currently being formed is information sharing, which has the potential to increase the cost-efficiency of the supply chain. These information sharing activities also create a risk, however, that competitors participating in an exchange will be able to use that participation to obtain access to proprietary information regarding prices, costs and output of other competitors that can be used to facilitate collusion.
For instance, at the FTC Workshop Lori Mirex, President and CEO of Currenex, Inc., a buyer-oriented exchange, expressed concern that in a supplier-controlled exchange, access to customers’ computers will enable suppliers to obtain data on purchases from competitors and collude on prices. She further suggested that when a supplier is an owner, it may be difficult to construct effective firewalls. FTC Tr. 188-189. Susan DeSanti, discussing the increased risk of collusion created by the technology employed by B2Bs, pointed out such concerns had resulted in the government bringing United States v. Airline Tariff Publishing Co., 1994-2 Trade Cas. (CCH) 70,687 (D.D.C. 1994) (final consent decree), in which the Department of Justice alleged that the defendant airlines had conspired to raise prices and impose fare restrictions by signaling each other through a computerized fare dissemination service. DeSanti, 13.
DeSanti also expressed the belief, however, "that many potential problems in the information-sharing area can be solved . . . ." DeSanti, 14. Indeed, our experiences with a number of exchanges suggest that concerns about improper information sharing can be managed through the appropriate use of devices such as pass codes and fire walls that ensure that each participant’s access to non-aggregated information is restricted to data concerning that participant’s own purchases and sales. Similar views were expressed by a number of FTC Workshop panelists.10 For the Exchange, such safeguards should be sufficient to ensure, for instance, that one wholesaler can not access data indicating the prices charged by competing wholesalers, or the costs of purchases made by those wholesalers (other than when the wholesalers are engaging in legitimate joint purchasing activities).
The parties forming a B2B marketplace like the Exchange can reduce further the likelihood that improper information sharing will take place by promulgating strict antitrust and confidentiality guidelines that provide, among other things, that improper sharing of competitive information will result in severe penalties, including possibly requiring equity members to sell their interests in the exchange and/or prohibiting the offending party(ies) from being able to conduct business through the exchange. Existing exchanges have recognized the importance of such antitrust compliance programs.
For instance, Patrick Stewart of MetalSite described how the organizers of that B2B brought antitrust counsel into the process at the beginning to develop policies and procedures to prevent improper use of proprietary information. This included audits regarding how MetalSite was managing information, and requirements that every employee read, sign, and receive training regarding MetalSite’s antitrust policy. FTC Tr. 101-105. Programs of this nature not only reduce the likelihood of improper information exchanges taking place, but also can be helpful in the event the exchange is investigated by the government by showing that the parties founding the exchange intend to operate it in compliance with antitrust requirements.
With respect to aggregated data like the data the Wholesalers contemplate disseminating through the Exchange, the parties forming an exchange should act to ensure that such information cannot be used to facilitate collusion by adhering, where possible, to the safety zone for dissemination of fee-related data among competing health care providers contained in Statement No. 5 of the DOJ and FTC Statements of Antitrust Enforcement Policy in Health Care (August 1996) ("Health Care Statements"). To meet the requirements for this safety zone: (a) the data should be collected by a third party (e.g., an outside accounting firm or other consultant), or an employee of the exchange who is not a current or former employee of any
competing member of the exchange; (b) the data should be more than three months old; and (c) there should be at least five parties providing data for each data point, no individual party’s data should represent more than 25 percent on a weighted basis for any data point, and the data should be sufficiently aggregated so that they will not allow recipients to identify the prices charged or costs of goods for any individual competitor.
Monopoly and Monopsony
Formation of a business-to-business marketplace like the Exchange can result in monopoly or market power in two different types of markets: (1) the market for exchanges in the industry being served by the exchange and (2) the markets for products and services in which the exchange participants operate. As noted above, in some instances, an exchange may be one of the few or even the only exchange in its industry. This may be due to internal growth, "network effects" that result in most industry participants flocking to what is perceived to be the industry’s leading exchange, restrictions on member participation in rival exchanges, mergers with other exchanges, or some combination of these factors. Under these circumstances, it may be possible for an exchange to exercise market power by increasing the fees it charges participants for its services above, and/or by reducing the quality of those services below, what would prevail in a competitive market.
Where competing members engage in joint production, research or marketing of products and services through an exchange, these activities can lead to the exercise of market power with respect to those products or services. For example, the joint provision of data regarding ordering and inventory through the Exchange, some of which had been provided on an individual basis by the Wholesalers, could result in the exercise of market power with respect to the fees for the data. See DeSanti, 10-11 (marketing collaborations may include agreements on price that can create, increase or facilitate the exercise of market power). Such potential monopoly effects should be evaluated under the Horizontal Merger Guidelines. Under the Merger Guidelines, principal areas of inquiry would include:
- whether formation of the venture will significantly increase market concentration in the relevant product and geographic market, and result in a concentrated market;
- whether, in light of concentration and other factors, the venture is likely to have anticompetitive effects;
- whether new entry or expansion by existing market participants will be timely, likely and sufficient in magnitude to deter any anticompetitive effects; and
- whether the venture will produce efficiencies that cannot be achieved by the parties through other means. Merger Guidelines, § 0.2.
In evaluating the market shares of the participants in an exchange for purposes of measuring concentration under the Merger Guidelines, it is important to consider the extent to which the exchange permits its members to participate in other exchanges. Even if the members of a B2B account for a l arge percentage of sales in the relevant market for the joint activity, formation of the venture may not pose a risk of market power if the members have the opportunity and incentive to conduct transactions through other exchanges or other distribution channels. See DeSanti, 11, n. 22 (citing Collaboration Guidelines, § 3.34).
Where members of an exchange contemplate engaging in joint purchasing activities like those planned for the Exchange, they need to consider whether the exchange will be able to exercise monopsony power. See DeSanti, 11. In general, under the Collaboration Guidelines, joint purchases accounting for 20 percent or less of the total purchases of any product or service in any relevant market are unlikely to raise monopsony concerns, while purchases exceeding this threshold need to be analyzed more closely. Collaboration Guidelines, Section 4.2. 11 To the extent that joint purchases through the Exchange appear to be increasing to a level that could raise monopsony concerns with respect to any product or service, the Exchange Board may be able to address these concerns by (a) limiting the percentage of their total purchases of the affected product or service that participants are required to make through the Exchange, and/or (b) limiting the number of Exchange participants who may take part in such purchases (e.g., by not allowing additional participants to take part in these joint purchases once purchases by existing participants reach 30 percent of total purchases in the relevant market, or by rationing 21 off slots to participants through an annual lottery so that total purchases of jointly purchased products by Exchange participants do not exceed that threshold).
Conclusion
The FTC has raised a number of important questions regarding the potential competitive effects of B2B exchanges. As the analysis above indicates, the creation and proliferation of B2B exchanges like the toy Exchange represents an important development that promises to bring increased competition and more and better products to consumers at lower prices in a broad variety of industries. In order to ensure that the procompetitive potential of these exchanges is achieved, however, careful analysis of the antitrust risks posed by an exchange, as well as practical guidance regarding how to minimize or eliminate those risks, will be essential.
We hope that this article, including the insights it offers from the FTC Workshop, can play a useful role in what promises to be an ongoing dialog between practitioners and antitrust enforcement authorities, both of whom are in search of ways to ensure that B2B exchanges realize their full potential.
FOOTNOTES
Because Covisint is in the early stages of its development and has not yet adopted bylaws, operating rules, or terms for participant access, because it is not yet operational, (continued ...) and in particular because it represents such a large share of the automobile market, we cannot say that implementation of the Covisint venture will not cause competitive concerns.
In re Covisint, Inc
., File No. 001 0127 (Sept. 11, 2000), closing letter to General Motors Corp., Ford Motor Co. and DaimlerChrysler AG, available at www.ftc.gov. More recently, the European Commission also approved the formation of Covisint. In doing so, the Commission noted that Covisint was organized in such a way as to be "open to all firms in the industry on a non-discriminatory basis, [ ] based on open standards and allows shareholders and users to participate in other B2B exchanges." See "Covisint Ready to Roll After EU Green Light," The Engineer, pg. S6 (August 10, 2001).
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